Gold as an investment: Think before you leap

Roddy Kohn explains why gold – contrary to popular myth – may not be the answer to all you investment ills.

A day rarely goes by these days without clients asking me about gold as an investment. Frankly, I wish I had a pound every time. I would indeed be rich, probably richer that those choosing gold for their portfolios.

It’s always worth remembering that just as conmen (and women) prey on investors when uncertainty abounds, so do ‘gold bugs’ spin their marketing hamster wheels to generate investor interest.

Gold in times of crisis

Gold, whether sold as a physical commodity or as a paper investment, is heavily promoted in times of crisis. Sadly, too many journalists desperate to fill some column inches give it the air time it really just doesn’t deserve. In fact, look at the chart below and you’ll see post the financial crisis and today’s pandemic the gold price goes through the roof.

Undoubtedly, if you happen to time that just perfectly (and it almost has to be perfect timing) then you would make a few bob. But that skill is often left to the institutions talking up their own book. In fact, as I type, a number of well-known investment banks are SHORTING gold as they expect the price to fall.

It is an oft-overlooked fact that buying at the peak of the crisis can leave you sorely out of pocket.

Isn’t gold a safe haven?

Historically, gold has been seen as a safe haven from tragic times. During the two world wars, where people were uprooted, it became a tradable commodity, as well as a currency that’s easy to transport and more stable than the crinkly stuff (often called ‘fiat currency’). In those times such arguments have more credibility than today. What’s more, most investors in gold overlook the volatility associated with it and highlighted above. After the financial crisis, as markets began their move back to a semblance of normality, gold fell by 40% as investors dumped the precious metal once stock markets started to rise strongly.

Volatility is not risk

Most investors I’ve come across often overlook the very thing that makes them nervous: volatility. It’s those gyrations of the stock market that seem to remind investors of a roller-coaster and the time they got off and felt sick and dizzy. Scarred for life they rarely return. However, gold’s allure somehow grips them like a strobe light on a dark night, and for a brief three-month period gold as an investment was a tremendous joyride, rising some 50%.

Again, returning to the facts of the matter, gold investors saw the price fall between 2011 and 2015, and then gyrate incessantly between 2015-2019. For many investors who bought in the grip of the financial crisis it took almost six years to get back in profit and nine years before your return would have outpaced inflation.

That’s not what most balanced investors enjoy, nor could it ever be ascribed a safe haven investment for the cautious investor.

Where’s my retirement income gone?

Most people invest their capital because when they get to retirement they want it to give them the income they lost from working. It’s worth remembering gold pays no income. Nor is it a corporation that you can expect to turn in a profit (gold mining companies are an exception to this, of course). It’s speculative. Its value to the person who wants to buy it from you is based on sentiment. That’s precarious at the best of times. But downright risky when institutional investors see an opportunity to pump and dump the precious metal when they are ready to get off the rodeo.

So the next time some slick salesman comes knocking with the panacea to all your investment ills, offering gold nuggets, bars or even exchange traded funds take our advice – remember, all that glistens is not gold. That buying gold is speculative and that the performance of gold as an investment can be lumpy.

So make sure you have a strong constitution. Over the long term gold, as part of a widely spread portfolio, may indeed be a contributor to total return. But it requires patience and at this heady price seems steep to me for what it offers in return. Even Goldfinger came unstuck.

• Roddy Kohn MSc (Finance) is a chartered member of the Securities Institute and Managing Director of KohnCougar

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